Mobile termination rates slashed – will you benefit?

‘Ofcom reduces mobile termination rates’ isn’t a statement that sets many hearts racing. But this week’s announcement that it will cut rates by 80% over the next four years could have a major impact on our call costs.

Mobile termination rates (MTRs) are what mobile networks charge other landline and mobile providers for receiving calls on their network.

In the early days of mobiles this was directly reflected in prices as it cost more to call a mobile on a different network. But now, the wholesale cost of calling different networks from your mobile is typically spread across all calls, so we pay one rate for of them.

Ofcom’s plan to reduce termination rates is surely good news for both phone companies and us, as their savings will be reflected in lower customer call charges, right?

What do mobile operators think?

Among the mobile operators, reactions to this question are mixed. I suspect 3 feels Ofcom’s plans don’t go far enough – it’s been calling for MTRs to be ‘terminated’. But other mobile big boys reckon Ofcom’s MTR reductions are bad news.

Vodafone has expressed ‘disappointment’ at Ofcom’s decision, O2 is concerned that ‘pre-pay mobile customers are likely to be hardest hit by the reductions’, and Everything Everywhere (made up of Orange and T-Mobile) is considering appealing against the decision.

What’s going on? Looking at some other operators and landlines could help explain.

How will call costs be affected?

For landline providers, the benefits of lower MTRs are clear. Currently, landline termination rates are a fraction of mobile ones, so BT – for example – must pay far more when its landline customers call mobiles than it gets in reverse.

That’s why we have to pay more for calling a mobile from our landlines.

Reducing MTRs will mean BT doesn’t have to pay the mobile operators as much. This is great for the likes of BT – which has promised to pass on savings to its customers – but less great for mobile operators.

It’s more complex with mobile to mobile calls. Smaller operators – such as 3 – have fewer customers on their networks. This means they’ll have more outgoing calls to rivals’ networks and fewer rivals’ calls to their own networks. So they’re paying more to the big three than they’re receiving in return.

Will PAYG users be worse off?

There are concerns that these changes could affect pre-pay mobile customers most. The big networks tend to have a high number of pay-as-you-go (PAYG) users who make very few calls and may receive more calls than they make.

The argument is that they can only offer these users a cheap service because they make money from those received calls via MTR. If termination rates are cut dramatically, big operators claim that maintaining a low-cost PAYG service could become difficult.

It’s hard to know how genuine these protestations are – calls are not mobile operators’ only revenue source, after all. Does this sound like a good move to you or are you worried that it could have a negative effect on your call costs?

MTRs are self-evidently unfair and I can see no justification whatsoever for them. Ofcom should have bitten the bullet and banned them completely.

MTRs are clearly anti-competitive. Just look who’s complaining – the big boys, Vodafone and O2, are ‘disappointed’ and ‘concerned’; the biggest boy, Orange, is ‘considering appealing against the decision’. I’ll bet it is, since it can see its profits being hit and smaller companies jumping up to challenge it.

Since I use a low cost PAYG service and very rarely ring mobiles either from my landline or my mobile it seems quite likely that I shall be worse off as a result of the proposed changes. Another possibility, however, is that companies will reduce subsidies on new phones (ie we shall have to pay the real price when we buy one or take out a contract). That wouldn’t necessarily be all bad since we might then buy phones not locked to a single provider, simplifying switching.